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Investors flee US junk bond funds as concern for the economy grows

US junk bond funds have suffered their biggest weekly outflows since the depths of the coronavirus pandemic in March, as investors fret over the sustainability of the US economic recovery.

Investors pulled $4.86bn from funds that buy US high-yield bonds in the week ending September 23, according to data from EPFR Global, the worst result since $5.6bn was withdrawn in the middle of March. 

The BlackRock iShares high-yield bond exchange traded fund — known by its stock market ticker HYG — suffered close to $2bn in outflows across Monday and Tuesday alone. 

Concerns over the persistent economic effects of the virus, alongside mounting fears of a contentious US presidential election, are pushing some investors to pare back their exposure to some of the riskiest companies in debt markets. This week President Donald Trump refused to commit to a peaceful transfer of power if he loses on election day.

David Norris, head of US credit at TwentyFour Asset Management, said the idea of a contested election was “very unsettling” and in the lead up to November 3, he expected “increased volatility”.

Hopes for another economic relief package ahead of the election also dimmed over the most recent week, with relations between Republicans and Democrats in Congress further complicated by the death of justice Ruth Bader Ginsburg and the coming fight over her Supreme Court seat.

Several Federal Reserve officials, including chairman Jay Powell and vice-chairman Richard Clarida, made clear this week that the US economic recovery hinges in large part on more fiscal support.

“High yield has pulled up to a stop light,” said Andrew Brenner, head of international fixed income at National Alliance Securities. “I think people are a little bit concerned, they are backing away from risk and I expect that to continue.”

The average yield across US junk bonds has risen more than half a percentage point in September to 5.83 per cent on Wednesday, the highest level in two months, according to an index run by Ice Data Services. It has pushed returns to negative territory this month, down 1.26 per cent so far in September, marking the first month of negative returns since March. 

The market had been buoyed by support for credit from the Fed, which has been buying corporate bonds including high yield exchange traded funds since May. It has also waded into the markets for municipal and government debt.

High-yield bond issuance has surged over that time as companies take advantage of rampant investor demand to load up on new borrowing to see them through the pandemic.

But mirroring the ebbing investor demand, issuance slowed this week and just six companies have tapped the market, raising $3.6bn, according to data from Refinitiv. That is a far cry from more than $18bn raised by 25 companies last week. 

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